Equinix Inc (EQIX) — Q3 2019 Earnings Call Transcript

Thank you. Good afternoon, and welcome to today's conference call. Before we begin, I want to remind everyone that some of the statements we will make today are forward-looking and involve risks and uncertainties. Actual results may differ significantly from those statements and may be influenced by the risks outlined in today’s press release and those noted in our filings with the SEC, including our most recent Form 10-K and 10-Q. Equinix has no obligation and does not plan to update or comment on forward-looking statements made during this call. Furthermore, in accordance with Regulation Fair Disclosure, Equinix's policy is not to discuss its financial guidance during the quarter unless communicated through a public disclosure. We will also present non-GAAP measures during this conference call and provide a reconciliation of these measures to the closest GAAP measures along with explanations for their use in today's press release on the Equinix IR page at www.equinix.com. We have made available on our IR page a presentation that complements this discussion, along with additional financial information and other data. We encourage you to check our website regularly for important updates about Equinix as we post important information there from time to time. Today, we have Charles Meyers, Equinix's CEO and President, and Keith Taylor, Chief Financial Officer with us. After our prepared remarks, we will take questions from sell-side analysts. At this point, I will hand the call over to Charles.

Thank you, Katrina. Good afternoon, and welcome to our third quarter earnings call. We had our best-ever third quarter bookings, reflecting strong execution of our strategy and demonstrating our ability to deliver clear and quantifiable value to our customers as they pursue their digital transformation agenda. Our retail business continues to thrive, generating over 4,400 deals in the quarter across 3,100 customers, with the majority of our bookings comprised of small to midsized multi-metro deals, fueling one of the strongest interconnection quarters in our history. We're executing effectively on our commitment to unlock the power of Platform Equinix for our customers, expanding our geographic reach, enhancing our market-leading interconnection portfolio and responding to evolving customer needs with the launch of new and innovative edge services offerings. By focusing on driving enhanced operating leverage in the business, we're enabling investment across our traditional retail business while layering in incremental capabilities, which together will drive higher attach rates, reduced churn and sustain and enhance cabinet yields over the coming years, allowing us to continue to deliver industry-leading returns. We are aggressively activating our channel, combining the value of Platform Equinix with partner solutions to accelerate our customers' journey to hybrid and multicloud as the clear architecture of choice. We outgrew the market globally with notable momentum in EMEA, and Equinix now holds the #1 position in 18 of the 25 countries in which we operate. And we continue to extend our global reach, announcing our plans to enter Mexico, the second largest economy in Latin America, with two new markets serving Mexico City and Monterey. In tandem with our strong operating performance, we're advancing a bold sustainability agenda with meaningful progress across environmental, social and governance aspects. We've made significant progress on our goal to use 100% clean and renewable energy for our data centers, with over 90% of our energy consumption today now covered by renewable sources. We were recognized by the U.S. EPA for our leading Green Power use, ranking #4 on the EPA's National Top 100 Partners List, and receiving the Green Power Leadership Award for the third consecutive year, recognizing our contribution in advancing the development of the nation's voluntary Green Power market. During the quarter, we also announced the addition of Sandra Rivera to our Board of Directors and the hiring of Justin Dustzadeh as our new CTO. We are thrilled to add their deep and diverse experience as world-class technology leaders as we continue to refine and expand our vision for the future of Platform Equinix. Turning to the quarter, as depicted on Slide 3, revenues for Q3 were $1.397 billion, up 8% year-over-year. Adjusted EBITDA was up 9% year-over-year, and AFFO was ahead of our expectations, excluding FX and FX-related impacts. Interconnection growth again outpaced colocation revenues, growing 13% year-over-year, driven by solid traction across all interconnection products and particularly strong momentum across our Cloud Exchange fabric. These growth rates are all on a normalized and constant currency basis. In October, we closed our first hyperscale JV, a greater-than-$1 billion deal with GIC, the Singaporean sovereign wealth fund. This is a strategic milestone for Equinix, enhancing our ability to respond to the rapidly expanding needs of the world's largest cloud and hyperscale companies while strengthening our leadership in the cloud ecosystem. We look forward to launching similar JVs in other operating regions and believe these efforts will continue to further differentiate Equinix as the trusted center of a cloud-first world. We now have over 356,000 interconnections, adding more per quarter than our top 10 competitors combined. In Q3, we added an incremental 8,500 interconnections, with high gross adds from both enterprise and network segments accompanied by lower-than-expected churn. We also surpassed 20,000 virtual connections, more than 5% of our overall count, and we expect these connections, which are dynamic and operationally efficient, to accelerate as customers leverage the capabilities on our SDN-enabled ECX Fabric. With over 1,800 customers now on ECX Fabric, we're seeing the strong ecosystem effects driven by expanding use cases, including WAN rearchitecture, distributed data, and rapid adoption of hybrid cloud across an increasingly rich range of cloud destinations. We also saw a growth of our Internet exchange in the existing and new markets, with 27% year-over-year increase in IX provision capacity. Our newly launched Network Edge product is generating strong market interest with a robust pipeline. This offer provides enterprises a faster and more efficient way to deploy virtual network services at Equinix, including routers, firewalls and load balancers from their technology providers of choice, including Cisco, Juniper, and Palo Alto Networks. Now let me cover highlights from our verticals. Our network vertical experienced record bookings, led by the major telcos subsegment and significant global MSP reseller activity as we partner with global providers to evolve their architectures and serve rapidly expanding enterprise demand. New wins and expansions included Silica networks, a leading fiberoptic provider, optimizing network to support growing customer demand; and Telia, a Nordic provider extending coverage with regional edge deployments. Our financial services vertical achieved robust bookings and strong new logo growth, with an uptick in the banking subsegment as firms continue to embrace digital transformation. Key new wins included Sterling Bancorp, rearchitecting the network to securely connect to partners, and a U.S. exchange startup leveraging the depth and reach of our expansive electronic trading ecosystem. Our content and digital media vertical produced solid bookings, led by strong growth in publishing, advertising and video subsegments. New wins and expansions included a global social media firm upgrading infrastructure to support their growing product line as well as a leading global ad tech firm, transforming network topology to distribute and analyze data. Our cloud and IT vertical continues to over-index with strength in the security subvertical as well as a strong increase in ECX Fabric participants as cloud consumers diversify towards hybrid and multicloud architectures. We continue to lead in cloud connectivity with over 3x as many metros with multicloud arm ramps as our nearest competitor. Our enterprise vertical experienced diversified growth across professional services, retail as well as notable strength in government. New wins included PruittHealth, deploying on Platform Equinix to support its growing health care ecosystem; Steve Madden, rearchitecting network and connecting to multicloud to better enable digital business; the Myers-Briggs Company, optimizing network and interconnecting business partners to support data management requirements; as well as further expansions from Walmart, deploying distributed infrastructure to support AI use cases. And our channel team had another great quarter, accounting for more than 30% of bookings with 60% of this activity going into our enterprise vertical as we use the reach and relationship of our partners to efficiently expand our addressable market. We saw partner wins across all end-user types, including insurance, federal government, banking, public utilities, and pharma, with network optimization and hybrid multicloud as key use cases. New channel wins this quarter included a multi-partner win with Presidio, F5, Microsoft, and Oracle for a large U.S. energy company supporting their data center consolidation and implementations of hybrid and multicloud access. Now let me turn the call over to Keith to cover the results for the quarter.

Thank you, Charles, and good afternoon everyone. I want to begin by expressing our continued satisfaction with our business performance and how Platform Equinix sets us apart in the industry. We are successfully scaling our core business while also investing in our future, including our operating structure and new offerings. We are dedicated to sustainability and diversity, inclusion, and belonging initiatives, which are important to our communities, customers, and employees. We had another strong quarter, with operational results meeting our expectations, despite being affected by foreign exchange issues. In terms of bookings, we achieved our best Q3 gross bookings performance ever, featuring an appealing deal mix and robust pricing. Interconnection activity was strong both physically and virtually. We're making significant headway in our new edge services. Furthermore, we realized positive pricing actions this quarter, keeping our monthly recurring revenue per cabinet steady in both reported and FX-neutral terms. In early October, we finalized our first hyperscale joint venture in EMEA, transferring two operational assets into the JV, generating $355 million of cash for Equinix, and we anticipate an additional €60 million over the next four quarters upon meeting certain conditions. We are also expanding our global platform with 28 projects across 21 metropolitan areas in 16 countries, which provides us a competitive edge. Moving on to quarterly highlights. Global Q3 revenues were $1.397 billion, marking our 67th consecutive quarter of revenue growth, an 8% increase from last year, and at the midpoint of our guidance range on an FX-neutral basis. In this quarter, we faced unusual FX volatility mainly due to Brexit's impact on the British pound and euro. Additionally, the Brazilian real weakened significantly, making it hard to hedge. There were also several one-off factors that influenced quarter-over-quarter revenue changes, including reduced tenant recoveries following a favorable tax decision concerning our Infomart Dallas asset, as well as lower-than-expected non-recurring revenues. Our Q3 revenues, after FX hedges, included an $8 million negative FX impact due to a stronger U.S. dollar compared to prior guidance. Global Q3 adjusted EBITDA was $675 million, a 9% rise from last year, despite seasonal utility cost increases and expansion challenges. This performance exceeded expectations, mainly due to lower maintenance costs, and was negatively impacted by $4 million in FX issues when compared to prior rates. Our Q3 AFFO was $473 million, an 18% year-over-year increase, surpassing our expectations on a constant currency basis, while accounting for a higher recurring CapEx. Additionally, AFFO, on a reported basis, included a $16 million increase in income tax expense due to FX-related tax gains from our hedging efforts. Based on the current FX rates, we expect much of this tax expense to reverse in Q4, reflected in our AFFO and per-share guidance. Global MRR churn was 2.3%, within our targeted range, and we project Q4 churn to stay between 2% and 2.5%. Interconnection revenues saw a significant increase over the previous quarter, with growth in all regions, now representing over 17% of our recurring revenues. Interconnection, both physical and virtual, saw healthy growth, leading to additional port capacity provision. The Americas and EMEA regions saw interconnection revenues rise to 24% and 10% of recurring revenues respectively, with APAC at 14%. Looking at regional highlights, APAC and EMEA showed the highest MRR growth rates at 13% and 12% year-over-year on a normalized basis, while the Americas grew at 4%. The Americas maintained strong bookings with a favorable mix of smaller deals and solid new logo additions, excelling in exporting bookings to other regions. Our new federal segment had a remarkable quarter, and we are excited about the opportunities within this customer base. EMEA also performed very well, driven by our operations in Germany and France with significant activity from network service providers. EMEA saw an increase in billable cabinets and strong deal pricing, achieving record net cross-connect additions and expanding into three new markets: Helsinki, London, and Stockholm. Meanwhile, the Asia Pacific region kept its momentum, despite challenges from the U.S.-China trade dispute and unrest in Hong Kong, with solid bookings in Hong Kong and Singapore, and the opening of our first data center in Seoul, entering a key digital economy as our 25th country of operation. Our Seoul venture is exceeding its initial bookings plan. Regarding our capital structure, our unrestricted cash balance is around $1.4 billion, down from the previous quarter's operating cash flow, with the ATM program not fully offsetting capital expenditures and dividends. Our net debt leverage ratio stands at 3.5x our annualized adjusted EBITDA for Q3, slightly elevated from the lower cash balance but still within our target range. As a newly rated investment-grade company and considering the current interest rate climate, we foresee significant interest savings through refinancing our existing debt and lower borrowing costs for future capital needs. At the close of Q3, our liquidity position, combined with a solid balance sheet, provides us with a notable strategic advantage. In terms of capital expenditures for the quarter, we spent approximately $557 million, including $47 million in recurring CapEx. We completed six new expansion projects that added 2,800 cabinets of capacity, including new IBX facilities in Helsinki and Seoul. We are continuing to grow our land bank, acquiring sites for development in Tokyo and Warsaw. Our capital investment is yielding strong returns, with our stabilized assets seeing a revenue increase of 3% year-over-year on a constant currency basis, maintaining a utilization rate of 85% and achieving a 30% cash-on-cash return on gross PP&E. As we review our 2019 guidance, we are maintaining our full-year revenue outlook while increasing our adjusted EBITDA guidance by $6 million due to strong operational performance, suggesting a revenue growth rate of 9% year-on-year with an adjusted EBITDA margin of approximately 48%. We have also decreased our integration costs to $9 million. With robust operating performance, we are raising our 2019 AFFO guidance by $8 million, with growth expectations between 13% and 14% compared to the prior year in normalized, constant currency terms. We anticipate slightly lower net interest expenses in Q4, and AFFO per share is projected to grow by 8%, factoring in the dilutive effects of both our Q1 equity raise and ATM program activities. We expect approximately 84.8 million common shares outstanding on a fully diluted basis. Lastly, we predict our 2019 cash dividend to approach $825 million, reflecting a 13% year-on-year increase and an 8% increase on a per-share basis. With that, I will stop and turn it back over to Charles.

Thanks, Keith. In closing, we had another great quarter, building on our unique source of competitive advantage and demonstrating the underlying strength of our business. We continue to separate ourselves from the competition, using our diverse go-to-market channels and our expansive balance sheet as tools to extend the scope, scale, and velocity of our flywheel business, while partnering with world-class players like GIC to enable us to simultaneously capture strategic footprints and deliver attractive returns in the hyperscaler market. We also continue to build new capabilities that will allow us to achieve our vision for the future of Platform Equinix, a future that will enable our customers to reach everywhere, connect with everyone, and integrate everything on their digital transformation journey. I am extremely pleased and privileged to work with our team of over 10,000, focused on building our products and platform, and executing against an ambitious set of priorities in service to our customers, all while steadfastly ensuring that our culture continues to thrive, making sure that we have the right people in the right roles at the right time, building a company that is positively impacting their world and where every employee can confidently say I'm safe, I belong, and I matter. So let me stop there and open it up for questions.

First, maybe you can dig into the tax issue in the Infomart and if that impacted the Americas colo revenue? And then second, what are the incremental costs, Keith, of the green initiatives that we should expect from here?

Phil, very astute question that you asked regarding the tax implications. We've talked about two sorts of currency or tax matters in our prepared remarks this quarter. First and foremost, as it relates to the revenue side of the equation, when we bought Infomart, there was a negotiation with the local taxing authorities and the value that gets ascribed to that building. We came to a resolution in Q3. But prior to that, there was a very large assessment that was essentially charged to the tenants of the Infomart building. So we absorbed the cost, and the tenants absorbed, if you will, the pass through of some of those costs. In Q3, once we settled the arrangement with the tax authorities, there was a meaningful step down in the number of taxes that we would collectively pay. As a result, for those tenants that were part of Infomart, they effectively are going to get a reduction on their taxes, which affects us directly in our recoveries, if you will, the revenues attached to that. But the bottom line is, you've got to step back and say, okay, the revenues come down, but economically, this was good for our tenants and even better for Equinix because we won a large tenant in the facility and we also absorbed a lot of the unused capacity in that space, and that tax burden gets passed on to us. So that was the first one. The second matter I just want to raise, because I think it's important, is a property tax issue that’s always attached to recoveries. The second issue for us regarding this tax is the income tax associated with favorable hedge gains that we had on our hedges. As a result, our income tax provision went up in Q3 because of how weak both the sterling and euro were relative to the U.S. dollar. As you know, a lot of that is reversed already in Q4, but we had to book the provision in Q3, and that's why you see that impact in the bridge. And then to return to your last question, really, which was on the green initiatives. Suffice it to say, Charles has made comments, as did I. We're very focused on ESG as a corporation and our green initiatives. Those initiatives come in many shapes and sizes, from how we procure our power to offsets and variable indirect power purchase agreements. Currently, we spend between $10 million and $20 million to become 100% green-oriented and driving our power consumption through green initiatives. We recognize it's important to our constituents and to our communities and is very important to our customers, given that we're in their supply chain.

But important to note, Phil, that it's been a while since we've been doing that, and so that's been baked into our operating results and is fully accommodated in our guidance.

Yes, I thought I heard that there would be some additional costs to absorb, but it seems like that's mostly addressed now.

Yes.

Okay. Can you provide an idea of the net impact on revenue from the Infomart side? Or perhaps what the underlying trend of the business would have been without it?

Yes. So basically, it would've taken us to the top end of our guidance range on an FX-neutral normalized basis. So basically, it was $4 million.

So we obviously had a large acquisition and merger in the industry last night. I was just wondering if you could share your thoughts on how that might change the industry dynamics. Do you have any perspective on what the European market might look like after that? And where does Equinix stand today in terms of looking at additional acquisitions or JVs? You've talked about doing those, or is that anything we'll see in the near term?

Sure. Yes. We fully expected that question would surface, Simon. Obviously, a big transaction in our industry for sure. I'll start with this: we've got tremendous respect for both of those companies. It's not too difficult to see why each of those parties might be interested in this combination. Interxion has always been a big risk competitor of ours in Europe, and I'm sure they'll remain as such. As for DLR, as I've said in many public forums, the overlap between our business and DLR's business is actually fairly small. That will probably not be the case with our xScale joint venture, where we're likely to be more consistently head-to-head, but in our core retail business, we only see them selectively as competitors. Just to put it into context, according to Synergy Research, DLR's entire retail business outside of Europe, which we would be appending from a retail perspective onto the Interxion business, that entire retail business outside of Europe is about a tenth the size of Equinix overall. So, in reality, I think the combination represents bringing together two very different businesses, a strong European retailer and a strong global wholesaler. So I think there's probably merit in the deal and an industrial logic to it. I think it's a bit of a stretch to say that the combination really meaningfully closes the gap in terms of trying to replicate the scope, scale, and value of Platform Equinix. And I would say the challenges in combining those businesses, just mechanically, let alone operationally, financially, and culturally, will certainly be non-trivial. And even if and when that's done successfully, I think we'll what comes out at the end is a company we'll feel pretty comfortable competing against, certainly in Europe, which we've been doing for years, and on a global basis. So I think it's understandable, but we're going to continue to sell the strength of our value proposition globally and feel like we're going to have great success with our customers. From an M&A perspective, we've said that we believe that it's an appropriate tool. At the same time, we're going to be pretty disciplined about that, and we're not going to chase valuations if we think they don't make sense for the business. Obviously, we feel really good about the transaction we recently announced in Mexico to enter that market. I feel like it was really sized right and priced right and gives us a real nice entry strategy into a very important market for us. There are a few other markets that I think we would entertain as M&A opportunities to enter, but again, we're going to make sure that we do that on a disciplined basis. So while we feel like it's an appropriate tool in the bag, we will use it with real discipline.

And the hyperscale JV timing for new markets?

We are actively working on that. As previously mentioned, we are engaged in Japan. The exact timing of those transactions is challenging to predict due to their complexity. However, looking ahead over the next couple of years, we anticipate adding several more joint ventures to our portfolio to offer the xScale range in key markets globally.

So Charles, in your prepared remarks, you talked about edge products, and it got me thinking about any trends that you're seeing in your cabinet adds in the Americas and the mix shift between Tier 1 markets and slightly smaller markets. Are you noticing any changes as you develop new capabilities? And could that inform your appetite to enter into, say, minor-league cities rather than just major-league cities?

Yes. We're not seeing any significant shifts in trends. Obviously, our major metros continue to drive the lion's share of both cabinet adds and revenue growth, but we do see real health in our other markets. I would say that we're going to start by offering our edge services in probably the more logical major metros. But to the extent we see momentum, I do think those will represent an opportunity for us to deploy infrastructure and drive cabinet yields into those markets as well. And again, depending on how use cases evolve, we will need to look at expanding that reach beyond our current footprint. We have a team that we refer to as the evolving edge team, and we're actively looking at how we would do that. But I would say right now, the bulk of the use cases are well met by the current footprint that we have. So being able to deploy our edge services, whether that be Network Edge or some of the others we might contemplate into our very expansive aggregated edge footprint today, we think meets most of the needs of the market, and we'll just continue to evolve or adapt as use cases dictate.

Okay. And then, on Seoul, just interested, are businesses coming to you for the very first time into that market? Or are they already in market and then using you for their expansion needs?

It's more, typically, our existing customers wanting to expand their infrastructure into Seoul, although we do have a team on the ground that is cultivating local business as well. But we said that our bookings are ahead of plan thus far. This is driven by the strength of a couple of key deals where some of our cloud and IT service customers were looking to expand their footprint into that market with a pretty significant deal that we landed in Seoul.

And lastly, just on churn, are there any differences you're seeing in what's driving edge? And any reason to think that you would gravitate towards the low end to the high end of your traditional range going forward?

No. It primarily depends on timing issues related to shifts between quarters, but there have been no substantial changes. We are still addressing the final aspects of the churn associated with the Verizon assets, and I believe we are now positioned to return to growth in 2020 for those assets. There are no significant shifts observed. The churn we are experiencing is mostly due to frictional issues and, to some extent, bankruptcies. Occasionally, we do see some selective workloads moving to the cloud, but usually this involves just a portion of an implementation instead of the entire project, as customers remain committed to hybrid and multicloud solutions. They continue to maintain private infrastructure alongside public cloud services. Currently, we are not noticing any meaningful churn-related shifts. However, over time, I hope we can achieve a clearer picture in our bookings mix, which shows a strong focus on interconnected deals. This is reflected in the volume of transactions and the number of deals completed, as well as levels of interconnection. These are positive indicators for our strategy execution. I believe that, moving forward, this will help us trend towards the lower end of our churn range. The best way to combat churn is by ensuring we have the right deployments from the onset. In this regard, we intend to avoid pursuing larger footprints that are more vulnerable to long-term churn. We will be directing those larger projects to our xScale entity, which is better equipped to handle such dynamics. I am optimistic that this will enhance our churn situation over time.

Can you provide some details about the multi-partner win with an energy company? Were you the only data center company involved in that deal, and what made it particularly unique?

Yes. We were, I believe, the only data center involved in that particular transaction. It was a data center consolidation activity and also integrating into a hybrid cloud architecture. They were utilizing Cloud Exchange fabric as their mechanism to integrate both their network and their cloud connectivity with their private infrastructure. It was a great multi-partner win and one we're really excited about in the quarter.

Okay. And looking at America's growth, just curious what you might do to maybe accelerate that going forward? And in particular, can you give us an update on the additional land around the Infomart that you could expand? And what's sort of where you are in the NAP of the Americas to be able to finish building out that facility? How might that help improve the growth in the Americas?

The Americas business continues to perform well, especially regarding business mix. The main factor will be overcoming the recent churn activity, which has exceeded previous levels and affected what was a $500 million business that has not seen growth, impacting the overall growth rate in the Americas. As churn decreases, we expect to see growth. We have opportunities to expand in key markets, and we are successfully filling the additional capacity in the NAP of the Americas. The expansion of the Dallas campus is in progress, and in the long run, we may introduce both larger footprint capabilities and increased retail options, which should generate additional growth from that market. However, a significant driving force will be our continued effort to increase quota-bearing headcount to capitalize on the substantial enterprise opportunities we identify. Our gross bookings performance in the Americas is strong, both in securing bookings for our assets in the region and fulfilling those globally across our platform. I believe that as we further develop our channel and direct selling initiatives in the area, and as we introduce new services, we'll also enhance cabinet yields, although it will take time for these new edge services to become established.

Maybe just following up on the growth. Stabilized growth, I think, was 3%, you said, in the quarter. I thought at least a few quarters ago, there was talk about getting that number back up to 5%. Just curious what you think the longer-term growth rate for stabilized growth should be? What parts could potentially get us a bit higher? Maybe it's just the improvement in the Verizon assets that you mentioned. And then secondly, in your previous guidance from last quarter, you assumed that the JV, the GIC JV would close, and I think it was in August, but they had it closing in October. Curious what the benefit to guidance is in terms of the update you just made for 2019 as a result of that delayed close?

Let me take the first one, and I'll ask Keith to address the timing and the GIC transaction. Relative to stabilized asset growth, yes, we've been hovering around that 3% to 4% mark. The catalysts for getting back into the 5% range would be, one, as you noted, getting the Verizon assets through the knot hole. I also think the 10 to 100 gig migrations have impacted those to some degree. We had a good quarter in that area, saw a reduction in interconnection churn, I don't think we're all the way through that though. The major players have largely made their moves in the Americas, but there will be more that will create some downward pressure on the stabilized asset growth. We're also actively migrating business out of some assets, which impacted our growth. A variety of factors are at play here. I'm encouraged by what we can do with our Network Edge offer and additional edge services because we can deploy shared infrastructure into some of those facilities, potentially driving some growth in cabinet yields. But that could be a longer-term proposition, putting us into that 3% to 4% range for a bit.

And Colby, as it relates to the second question for Q4 – for Q3, there's really no meaningful movement, as you know, for the Q3 quarter. When we offered our prior guidance, it was more about the influence that was going to take place in Q4. Just to remind you and everybody else on how this gets accounted for, recognizing that there is fee income that will come with the joint ventures as we continue to scale them. The fees come in through the top line through revenue, while the equity ownership of the 20% ownership comes through below the line, it will be in AFFO but below EBITDA in the form of income from affiliated entities. That's how it'll present itself in our financials. Suffice it to say, this quarter for Q4, our guidance implications for Q3 is negligible. Think about $2 million on either side. The reason for that is the timing of the costs, timing of the fees, and timing of the income streams associated with those customers in Seoul. We will continue to keep everybody updated on this JV and other ongoing JVs in terms of the fund flow, but for this year, as we said, there will be no meaningful impact on our financial results and it's essentially absorbed into the ongoing.

Two questions. First, just curious how you're looking at the opportunities to recycle capital for some of the existing assets, whether it's markets that you may not think of as core to the portfolio or situations where it might be just an opportunity to take advantage of the private market. And the second question is just with the ATM program. Is there a framework or allocation strategy that investors should think about in terms of the timing or the ways you may access that program in the future?

So Charles and I are looking at each other. Who wants to answer that question? I think, on the first one, let's just touch base on that first and foremost. Overall, as you hear us say, we really refer to Equinix as a platform. Periodically, there are assets that would be disposed of, not so much because we're trying to recycle capital, but it’s more about the strategic value of that asset relative to our platform and where we want to invest. Occasionally, we choose to turn down a site or sell a small asset when it came with an acquisition. We did that with Switch & Data and also recently sold our New York 12 asset. It's not really about recycling. It’s about creating momentum and having the right assets. It's important to understand that every asset is highly important to us. That’s why we’re probably not as traditional in thinking about recycling because it is the platform. As we get into the discussion around the ATM program, which ties into our broader funding discussion. Back in June 2018, we talked about our business growth over the five-year period 2018 through 2022 and the funding needed. It would come in both debt and equity forms. There’s no perfect way to describe our ATM utilization; we try to take advantage when it makes sense for shareholders, and we will avoid it when it’s not beneficial. For instance, in December of last year, when we were at a 52-week low, we were not in the ATM program. When we reached all-time highs, we occasionally pulled down equity to fund growth, given our capital needs. We expect to do more debt financing because of decreasing costs. We’re guarding our investment-grade rating and operating within our targeted leverage range. It’s a long-winded way of saying that we’ll be prudent, using the ATM wisely to maximize returns for our investors. We currently have roughly $300 million left on the program that we approved in December. We have cash in our balance sheet of $1.4 billion at the end of Q3 while also bringing in $355 million from the October closing of the JV. We’re going to be prudent about how we refinance our debt, raise new debt, and utilize the ATM on a go-forward basis.

Just moving back to the drivers during the quarter, EMEA was called out as a powerful driver for the quarter. Can you give us a little bit of an update in terms of where we stand vis-à-vis the accelerated demand you're seeing in the region? Or maybe the catch-up versus the Americas? And then I have a follow-up.

I think we've seen relatively broad-based demand and strength in the European market. Our U.K. market continues to be strong despite Brexit uncertainty, et cetera. We have the luxury of a really broad-based business on the continent, and it continues to perform very well. We’re also still seeing cloud providers entering that market more comprehensively. That has driven both our direct business with us regarding their network nodes and private interconnection nodes, and I think now will fuel the JV business significantly associated with the large footprint. The enterprise movement to hybrid and multicloud really seems to be catching up with the Americas. So overall, it’s a strong market, and the breadth of our business is showing up nicely. The teams are doing a great job. We're seeing strong channel activity in that business as well. I would say both Europe and Asia were a little later in terms of channel adoption, but we're seeing really strong channel uptake there as well. So I wouldn't say anything is trending negative; it’s definitely a strong market overall.

And the outlook continues to be good, right? It sounds like it still has legs?

It does. Yes, we're not seeing any softening there. We have a clear understanding of our fill rates and a deep visibility into our pipeline. We're continuing to allocate capital. We might have had a bubble of capital that came through over the last couple of years in Europe, but there’s sustained demand there, so we will continue to invest in that market as well.

Was there incremental hyperscale leasing volume during the quarter that you could speak to?

No. We're still working through those. But I would say we have a very strong pipeline. We're relatively fresh off close on the JV and refining our processes with our partner in terms of forecasting. We’ve had productive discussions with the 12 or so companies we see as the primary drivers of hyperscale demand, and we have plenty of pipeline to support our JV aspirations.

Lastly, could you provide more details about the pricing strength you're observing? Is it driven by escalators, renewal spreads, or something else?

No, Jordan. To just add, this was one of our top performing quarters across the year, but it was our best-ever Q3. There’s always a bit of seasonality involved in our business. The key drivers behind that are threefold. First, the deal mix is very positive. The average deal size is smaller, allowing us to enjoy a better return on a per cabinet basis than we would with larger deals. Secondly, interconnection revenues and the opportunities that present themselves. We do a very good job selling this platform. The third piece that shouldn’t be overlooked is that we're always working to adapt to the market environment. With price negotiations, the net positive pricing actions we've seen reflect our ability to manage these dynamics. We're in a position to enjoy positive price actions moving forward, and that’s reflected in our healthy performance this quarter.

Yes. I'd just reinforce that, Jordan. The disciplined execution of our strategy makes it hard to drive growth using smaller deals, but it’s the right approach for long-term returns and customer value. When you look at the broader industry, particularly in the wholesale and Hyperscale market, current pricing versus entry pricing may not yield a positive picture. Luckily, we have limited exposure to that on a relative basis. Essentially, we’re getting cumulative effects of positive pricing increases with considerable success in our contracts rolling through the system.

Maybe related to the channel strength, how broad-based is that geographically? And is there an opportunity to further build out those relationships in new markets? And then separately, you are adding meaningful new capacity next year in the Americas. Would you expect that to drive an acceleration in net cabinet adds in that market?

Yes. Great questions. The answer to both is probably a simple yes, but let me give you a little more color. I think, channel-wise, we can continue to add both geographic coverage and partner types to increase our reach. Like many channel programs, we see a bit of 80-20, with 20% of our partners delivering a significant chunk of our bookings. Interestingly, we’re observing greater productivity across the board, meaning we are broadening our channel. We are less focused on adding new partners and more on enhancing the productivity of existing ones. Our existing partners, such as AT&T and Verizon, are critical strategic partners and now leverage our data center portfolio to deliver to their customers. Also, we’re working closely with hyperscalers. Many of them see their customers wanting to integrate more services, leading to joint selling with them. Regarding capacity in the Americas, yes, new capacity typically adds some uplift. We anticipate some anchor customers inside larger phases, which could lead to further cabinet adds. Additionally, the discipline we have in the business informs our developments and opportunities.

I just wanted to follow up on the prior question. If you could just rank the regions that contributed or basically hit over this 30% hurdle rate that you reported this quarter, which regions were above the 30%? Which ones were below? And then I have a follow-up.

I don't have that data right off the top of my head. I expect that the Americas was meaningfully above that. I'm not sure if the others were at or below the 30% in terms of their indexing. However, I do see that all three regions are trending positively in terms of channel bookings as a percentage of overall.

Got it. And at what point do you think would be the limit or the ceiling to this contribution from this sales motion? Would you throw out like 40%, 50% of bookings in any given quarter? Is that where this is going to top out? Or maybe you could give me any idea on where we could expect this thing to top out in the future?

Yes. It's going to depend on how our business mix and new product portfolio continues to perform. Over time, delivering digitally-enabled services, such as Network Edge, should be consumable by our customers directly and via channel partners with minimal friction. I believe this will increase the percentage of bookings done through our channel. However, currently, we're more of a sell-with model, and we’re fine with that. While we see the 50% threshold being potentially reachable, the timing will depend on various factors. We're excited about our trajectory since customers want to solve problems that involve integrating our value with others. So, there’s a lot of potential upside.

Great. And then one last question. Sorry to keep everybody on this call. But on stock-based compensation, Keith, could you give us a little more insight into why stock-based comp grew 34% year-on-year and now makes up about 4.5% of revenues? The same time, last year, it was more around 3.5% or a bit above that. Can you give us any thoughts on this increase? It’s about the second quarter this happened. So just provide any insight for this quarter.

That's what a strong stock price does, as you can appreciate. Think about where the stock was in December and where it is today. The important thing for our Compensation Committee and for Charles, myself, and Brandi, who runs HR with us, is to balance compensation to attract the right people into our organization while also controlling burn. This is critical to understanding our funding strategy and driving value into the share. Our stock-based compensation as a percentage of revenue tends to increase when stock performs well, but that does not mean we're diluting our stockholders more. It merely reflects what’s taken place, and moving forward, lower stock values should lead to less issuance.

Great. That concludes our Q3 call. Thank you for joining us.